GBP/USD Daily Forecast – Sterling Holds Near Lows Despite Dollar Correction

Bank of England’s Hands are Tied

The takeaway from yesterday’s BoE meeting was that the central bank is not likely to do much until it is clear how Brexit will play out.

Governor Carney discussed that the economic outlook warrants gradual rate increases but at the same time warned of Brexit risks. Several of the questions in the Q&A portion were about Brexit and the BoE’s view on the chances of a no-deal Brexit.

While Carney offered some views on the risks of a no-deal Brexit, I don’t think the BoE is looking at that scenario here, or at least not yet. Carney offered a reminder that the central bank has always looked at the worst possible potential outcomes and have taken all paths into consideration.

Trump Announces Further Tarriff’s

US President Trump said he will put a 10% tariff on $300 billion of Chinese goods yesterday. The announcement led to a sharp fall in equities while gold and safe-haven currencies rallied.

The dollar index followed and has erased a bulk of the gains that came as a result of the Fed meeting. GBP/USD continues to veer from correlation here as the currency pair has held near weekly lows.

Yesterday’s market reaction has led to a repricing of rate cut probabilities at the next Fed meeting in September. After significantly paring back expectations on Wednesday, the markets are once again nearly fully pricing in a quarter-point cut at the next meeting.

Perhaps the US jobs report that will be released later today stands to change that, however, the markets did not put much weight to stronger data in July. For that reason, I think the risk here is greater on a disappointing jobs report.

Technical Analysis

A bulk of the decline in GBP/USD happened in the early week. Since then, the pair has mostly consolidated near current lows. I do think the pair is a bit oversold here.

At the same time, there is a clear breakdown and yesterday’s price action has not altered that. This is in contrast to several major currency pairs which have shown reversal candlestick patterns as a result of yesterday’s price action.

The level I have been watching in the second half of the week falls at 1.2150. So far, the exchange rate has mostly traded around it and formed a consolidation. Yesterday’s rally attempt was blocked by the level. A sustained break is likely to signal a recovery.

To the downside, the 1.2100 level has been significant. There have been several attempts below the level but none were sustained. A sustained break targets the psychological 1.20 handle.

Bottom Line

• GBP/USD has fallen in a range after a sharp drop in the early week.
• Sterling has been under performing in the last 24 hours compared to its major counterparts.
• The US jobs report will be released later today and will be the next driver for GBP/USD.